Italy: Country Profile

Country Report | 26 Jul 2019

Italy's economy will contract slightly in 2019. Sluggish employment growth and a
rising household saving rate are holding back private consumption, while weak
external demand and global trade tensions are hurting exports. Lower business
confidence and weak demand are depressing private investment, while project
planning and execution delays continue to hinder public investment. Growth of real
GDP will be 0.3% in 2020 and then moderate to be around 0.8% per year in 2023-
2023.

KEY POINTS
ΠItaly's growth prospects are moderate given the economy's limited growth
potential. Real GDP will fall by 0.1% in 2019 - down from 0.9% in 2018.
ΠPrivate final consumption (in real terms) rose by 0.6% in 2018 and gains of 0.3%
are expected in 2019. Consumers' concerns about the country's banking system are
a drag.
ΠThe percentage of the workforce that is employed is slowly rising. Unemployment
was 10.6% in 2018. It will dip to 10.3% in 2019 but this still exceeds the eurozone
average. Nearly a third of young people are without work. Fiscal incentives for
hiring younger workers could support the growth of jobs. Projected rates of
economic growth are not sufficient for Italy to deal with its financial legacies.
Growth of real GDP will be 0.3% in 2020 and then moderate to be around 0.8% per
year in 2023-2026.

Chart 1 Real GDP Growth and Per Capita GDP: 2013-2019

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

Note: Data for 2019 is forecast. GDP per capita are in constant 2018 prices

FACTS

Area
294,100 square kilometres

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Currency
Euro (? = 100 cents)

Location
In the north, Italy meets with France, Switzerland, Austria and Slovenia. In the
south, it divides into two peninsulas, the lower of which almost connects with the
island of Sicily.

Capital
Rome

GOVERNMENT

Head of State
Sergio Mattarella (2015)

Head of Government
Giuseppe Conte (2018)

Ruling Party
A coalition between the Northern League, the Five Star Movement and some
independents, leads the government.

Political Structure
Italy has been a republic since 1946, when it abolished the monarchy. The
president is elected by parliament and 58 regional representatives for a seven-year
term and exercises only semi-executive functions. The prime minister is appointed
by the president. The 630-member Chamber of Deputies (Lower House) is elected
for five years by universal suffrage through a system of proportional representation,
as are all but seven of the 315-member Senate.

Last Elections
Mattarella was elected president by Parliament in January 2015. Parliamentary
elections were held on March 4 2018. In the Chamber of Deputies (lower house) the
Centre-right coalition of four parties (led by Matteo Salvini of the league) took 265
seats. The Five Star Movement (led by Luigi Di Maio) received 227 seats, the
Centre-left coalition of five parties won 122 seats and the Free and Equal Party
took 14 seats. In the Senate, the Centre-right coalition of four parties received 137
seats, the Five Star Movement took 112 seats, the Centre-left coalition of six
parties won 60 seats and the Free and Equal Party garnered four seats. In each
house, two smaller parties representing Italians abroad received a seat each. Conte
was named as prime minister in May 2018.

A constitutional referendum was held in December 2016. The referendum was

intended to reduce the power and cost of the Senate and streamline the
parliamentary process. In the end, just 40.9% of voters approved the referendum
compared with 59.1% who opposed it.

Political Stability and Risks

Italy's immigration problem has worsened. More than 93,000 migrants arrived in Italy

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by sea during 2017. This represents a 6% increase over the same period in 2016,
which was itself a record year. The EU has offered Italy another ?100 million in
funding to manage the migration crisis. This sum is in addition to the ?800 million
already pledged.

International Issues
The Italian government is especially concerned about the number of illegal
immigrants arriving from Africa. Rome suggested that Italy could stop the vessels of
non-governmental organisations from disembarking rescued migrants in Italy.

Government Finance
In 2018, public debt was at ?2,317 billion - equivalent to 132% of GDP - the second
highest in the eurozone after Greece. The size of the debt to GDP ratio is forecast
to steadily reduce in 2019 and beyond.
The budget deficit was 2.4% of GDP in 2017. In 2018, a deficit equal to 2.1% of
GDP was recorded. The deficit target for 2019 is 2.6% of GDP and officials intend to
gradually reduce this figure over the next several years.

Spending on social security and welfare accounted for 43.1% of all government
expenditure in 2018 followed by spending on general public services (16.7%).

Chart 2 Public Debt: 2013-2018

Source: Euromonitor International

ECONOMY

Economic Structure and Major Industries

The agricultural sector employs 4.0% of the workforce but is well diversified,
producing soft fruits and vegetables as well as wheat, olives and citrus products for
export. The most fertile areas are in the north. In the south, agriculture is mainly
for subsistence purposes. More than 70% of the country's farms are small and
inefficient.
Manufacturing accounts for 17.5% of GDP and employs 19.0% of the workforce.
More than 90% of the industrial sector is made up of small and medium-sized firms
that are mainly found in the north-east and the centre of the country. These small
firms face great difficulties obtaining credit. Among the country's large firms,
business investment in machinery and equipment is rising due to generous

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investment tax incentives and the need to renew productive capacity.
Manufacturing output has recorded steady gains during 2018.
The service sector makes up 72.1% of GDP. Italy's tourist industry is important
though it has lost ground to other destinations. The real value of inbound tourist
and business travel receipts rose by 4.6% in 2018 and growth of 2.4% is expected
in 2019. In the financial system, Rome and Brussels reached an agreement on the
rescue of Monte dei Paschi di Siena, Italy's oldest bank. The government has also
wound down two failing mid-sized lenders. The value of non-performing loans has
fallen but is still very high. Weaknesses in the property market are another problem
for the country's troubled banking system.

Overview of the Economy

Italy's economy has struggled mightily in recent years. Weaknesses in domestic
demand were a significant drag owing to tight lending conditions and an on-going
process of fiscal consolidation. The economy recorded only modest gains in 2015-
2018. Domestic demand was the main engine of growth. Investment also saw
modest gains as a result of new tax incentives and low interest rates. The fragile
state of the Italian banking sector was a persistent problem. Today, Italy's
economy is only marginally larger than in 2000 while other leading EU economies
have expanded by 25% or more.

Italy's economy has also seen a decline in its potential economic growth as costs
rose and productivity growth stagnated. These problems are largely rooted in
country-specific factors. The country is divided into a highly industrialised and
developed northern part, where approximately 75% of the nation's wealth is
produced; and a less-developed, agriculture-dependent south. Firms in the north
specialise in the manufacture of premium finished products and are closely
integrated into the German manufacturing system, involving everything from cars to
washing machines. In contrast, most industry in the south is controlled and
financed by the state. Unemployment in some parts of the south is as high as 40%.

Foreign Trade
Italy faces increasing competition (in both domestic and international markets) from
Eastern European and Asian suppliers. The country's share of world exports (in
volume terms) has been steadily falling. Hardest hit have been traditional exports
such as textiles, leather and apparel
In 2018, exports amounted to 26.4% of GDP. Exports (in dollars) rose by 7.7% in
2018 and a fall of 0.4% is forecast for 2019. Feeble growth in productivity limits
gains in competitiveness.
In 2018, 56.6% of all exports went to other EU countries. Germany and France are
the largest export markets. The dominant export sector is machinery and electrical
equipment which accounted for 25.6% of total exports in 2018.
The current account surplus was 2.5% of GDP in 2018 and it will widen to 2.6% in
2019.

Chart 3 Total Foreign Trade: 2013-2019

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Source: Euromonitor International from national statistics/OECD/IMF
Note: Data for 2019 is forecast.

Economic Prospects
Italy's growth prospects are moderate given the economy's limited growth
potential. Real GDP will fall by 0.1% in 2019 - down from 0.9% in 2018. Sluggish
employment growth and a rising household saving rate are holding back private
consumption, while weak external demand and global trade tensions are hurting
exports. Lower business confidence and weak demand are depressing private
investment, while project planning and execution delays continue to hinder public
investment. The near-term outlook for the manufacturing sector suggests some
weakening ahead. The vulnerability of public finances is a risk.

Prices rose by 1.1% in 2018 and inflation will be 0.9% in 2019. In the medium-term
inflation is predicted to rise, mainly as a result of higher energy prices which will be
further amplified by a weaker euro and rising wages.

Private final consumption (in real terms) rose by 0.6% in 2018 and gains of 0.3%
are expected in 2019. Consumers' concerns about the country's banking system are
a drag.
The percentage of the workforce that is employed is slowly rising. Unemployment
was 10.6% in 2018. It will dip to 10.3% in 2019 but this still exceeds the eurozone
average. Nearly a third of young people are without work. Fiscal incentives for
hiring younger workers could support the growth of jobs. Labour productivity is low
owing to a lack of investment in human capital. The service sector is the main
driver of additional employment and this also keeps productivity low.

Chart 4 Real GDP Growth: 2013-2019

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Source: Euromonitor International from national statistics/Eurostat/OECD/UN/IMF
Note: Data for 2019 is forecast

Evaluation of Market Potential

Downside risks to economic growth have become more prominent amid heightened
global and domestic policy uncertainty, including heightened trade protectionism.
The rise in household spending is set to continue in light of rising wages and
employment. But higher oil prices are expected to weigh on disposable incomes and
slightly dampen private consumption. In 2019, the phase-out of tax incentives and
gradually rising interest rates is forecast to dampen investment growth. Other
problems include a rapidly ageing population, lagging productivity, a cumbersome
bureaucracy and the high level of state debt.

Italy lags behind other EU member states in providing high-quality education and
this slows the growth of productivity. The proportion of those aged 25-34 that
have completed higher studies is just 21%. Projected rates of economic growth are
not sufficient for Italy to deal with its financial legacies. Growth of real GDP will be
0.3% in 2020 and then moderate to be around 0.8% per year in 2023-2026.

FDI - though moderately high in the north - is far less than that in the UK, France
and Germany. In the underdeveloped South, FDI is virtually non-existent. Officials
have proposed a plan to boost investment in infrastructure.

BUSINESS ENVIRONMENT
Italy's tax-to-GDP ratio is among the highest in the EU. Not surprisingly, tax evasion
of all types is estimated to cost the government about ?300 billion each year (15%
of GDP) according to tax authorities. Tax simplification is expected to support
economic activity and strengthen competition. Regulatory bottlenecks curb
competition in key professional services. Italy's large informal economy is thought
to cost the government of at least ?120 billion in unpaid taxes.
Rome has promised a ?5 billion cut in property taxes for primary residences. An
increase in the VAT rate was implemented in 2017. The hike was partially offset by
a reduction in the corporate income tax rate. The adoption of a flat tax on small
firms' income (also in 2017) provides some help for SMEs. A simplified tax regime for
small enterprises will be introduced in 2019. Italy's new Jobs Act should improve
performance and flexibility in the labour market. A VAT increase intended for 2018
has been postponed until 2019.

Investment in machinery, equipment and advanced technologies (which rose by

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more than 6% in 2017), should benefit from the extension of tax incentives
contained in the 2018 budget.

ENERGY
Italy has 0.6 billion barrels of proven crude oil reserves. There are three main oil-
producing fields in southern Italy and other fields located offshore in the Adriatic
and in Sicily (both onshore and offshore). The country produced 4.5 million tonnes
of oil equivalent in 2018.
Italy also has 40.6 billion cubic metres of proven reserves of natural gas and it
produced 4.5 million tonnes of oil equivalent in 2018.
Within the EU, Italy has the greatest crude oil refining capacity, at 2.3 million
barrels per day. There are large oil refining facilities along the Mediterranean coast
and on Mediterranean islands, capable of processing a wide range of crude oils from
North Africa and the Persian Gulf.

Italy's energy efficiency (defined as GDP per tonne of energy consumed) is slightly
above the average for West Europe. Energy efficiency rose by 0.9% per year in
2013-2018.

Chart 5 Primary Energy Supply (% of total): 2018

Source: Euromonitor International from International Energy Association (IEA)

SOCIETY

Population
Italy's population totalled 60.5 million in 2018. This represented an increase of 3.6
million over the figure for 2000. Median age was 46.3 years in 2018 - 6.2 years
greater than the figure for 2000 and significantly higher than the regional average.
As measured by median age of population, Italy currently has the second oldest
population in Europe (behind Germany).
The fertility rate has risen slightly in recent years but at 1.4 births per female it is
well below the replacement level. Fertility will edge up to about 1.5 births per
female by 2030.
Virtually all population gains in recent years are due to immigration. The government
is especially concerned about the number of illegal immigrants arriving from Libya.

Chart 6 Age Pyramid in 2018 and 2030

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Source: Euromonitor International from national statistics/UN
Note: Data for 2030 is forecast

Income and Expenditure

Italy's savings ratio is slightly below the regional average. In 2018, savings were
7.5% of disposable income and the ratio will dip to 7.3% in 2019.
In 2018, consumer expenditure per capita totalled ?17,825 (US$21,041). In 2019,
the indicator will rise by 0.5% in real terms. During the period of 2019-2030, health
goods and medical services and transport are expected to be the categories
showing strongest growth in expenditure.

In the period 2019-2030, total consumer expenditure will grow at an average annual
rate of 0.8%. It will increase by a cumulative value of 8.6% during that period.
Total consumer expenditure will represent 61.5% of GDP in 2019.
Disposable income per capita was ?18,901 (US$22,311) in 2018. Disposable income
per capita (in real terms) will rise by 0.3% in 2019.

During the period 2019-2030, total disposable income will increase by a cumulative
value of 5.1% in real terms - growing at an average annual rate of 0.5%.

Chart 7 Per Capita Annual Disposable Income, Spending and Savings Ratio:
2013-2019

Source: Euromonitor International from national statistics/trade sources/OECD

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Note: Data for 2019 is forecast. Per capita income and spending are in constant 2018 prices

Statistical Summary
2012 2013 2014 2015 2016 2017 2018
Inflation 3.0 1.2 0.2 0.0 -0.1 1.2 1.1
(%
change)
Exchange 0.78 0.75 0.75 0.90 0.90 0.89 0.85
rate (per
US$)
Lending 5.2 5.1 4.9 4.1 3.5 3.0 2.7
rate
GDP (% -2.8 -1.7 0.1 0.9 1.1 1.7 0.9
real
growth)
GDP 1,613,264.9 1,604,598.9 1,621,827.5 1,652,085.3 1,689,823.9 1,727,381.4 1,756,981.6
(national
currency
millions)
GDP (US$ 2,072,870.8 2,130,482.3 2,151,733.3 1,832,272.9 1,869,201.6 1,946,788.4 2,073,966.0
millions)
Birth rate 9.0 8.5 8.3 8.0 7.8 7.6 7.4
(per '000)
Death rate 10.3 10.0 9.8 10.7 10.1 10.7 10.5
(per '000)
No. of 25,712.0 26,121.7 26,874.3 27,129.6 27,305.3 27,488.1 27,640.6
households
('000)
Total 501,547.1 518,109.0 529,804.5 456,988.8 461,732.4 507,415.3 546,645.0
exports
(US$
millions)
Total 489,106.7 479,339.7 474,398.1 410,919.5 406,785.9 453,119.8 500,793.2
imports
(US$
millions)
Urban 40,816.8 41,173.4 42,105.0 42,291.6 42,377.8 42,501.4 42,605.4
population
('000)
Urban 68.7 69.0 69.3 69.6 69.9 70.1 70.4
population
(%)
Population 14.0 14.0 13.9 13.8 13.7 13.5 13.4
aged 0-14
(%)
Population 65.2 64.8 64.7 64.5 64.3 64.2 64.1
aged 15-64
(%)
Population 20.8 21.2 21.4 21.7 22.0 22.3 22.6
aged 65
(%)
Male 48.4 48.4 48.5 48.5 48.6 48.6 48.7
population
(%)
Female 51.6 51.6 51.5 51.5 51.4 51.4 51.3
population
(%)

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 Life 79.8 80.3 80.7 80.3 81.0 80.8 81.0
expectancy
male
(years)
Life 84.8 85.2 85.6 84.9 85.6 85.2 85.3
expectancy
female
(years)
Infant 2.9 2.9 2.8 2.8 2.7 2.6 2.5
mortality
(deaths per
'000 live
births)
Adult 99.0 99.1 99.1 99.0 99.0 99.0 99.0
literacy
(%)

Imports and Exports

2018 2018
Major export destinations Share (%) Major import sources Share (%)
Exports (fob) to Europe 66.6 Imports (cif) from Europe 68.8
Exports (fob) to Asia Pacific 10.3 Imports (cif) from Asia 15.3
Pacific
Exports (fob) to North 10.0 Imports (cif) from Africa 9.0
America and the Middle East
Exports (fob) to Africa and 7.7 Imports (cif) from North 4.1
the Middle East America
Exports (fob) to Latin 3.1 Imports (cif) from Latin 2.2
America America
Exports (fob) to Other 1.3 Imports (cif) from Other 0.3
Countries Countries

© Euromonitor International 2019

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